Thursday, July 18, 2013

Mortgaging the future

If anyone thinks the Government debt is manageable,
think again. Unless they give inflation a massive boost by printing lots of
money – and impoverishing us at the same time – I reckon it will take almost
900 years to pay off.

I woke up at 5am worrying about it and I did the
sums.

GDP in the UK is £1,580 billion (2012-13).
Government revenue is £600 billion (2012-13). Government revenue represents
37.5 per cent of GDP.

To meet its spending commitments, the Government
borrowed an extra £85.1 billion (at least; the Centre for Economics and Business
Research puts the figure at £120 billion).

A one percent increase in GDP generates £6 billion
of Government revenue.

All other things being equal (no tax rises, no spending
cuts, no inflation) to reduce annual borrowing to zero, the Government would
need GDP growth in one year of 14.2 per cent (14.2 x £6 billion = £85.2
billion).

Clearly that is impossible in more or less any
circumstances. Despite annual fluctuations, the long-term trend is for the UK’s
GDP to increase at an annual rate of two per cent.

On that basis, if all the Government’s proceeds of
growth were used to repay debt, it would be able to reduce its borrowings by
£12 billion a year. At that rate, it would take seven years before the
Government no longer had to borrow money to make ends meet.

However, during that period the total amount of
debt would continue to rise, but a little more slowly each year. The debt would
increase by £344 billion to £1,544 billion.

If the Government continued to repay money at the
same rate (£12 billion a year) once it had ceased to borrow any more, the total
debt would be wiped out in a further 128 years. This assumes the same interest payments
are made throughout the period at three per cent. In fact, payments would
gradually reduce and therefore the repayment period would be shorter.

Still, with no increase in State spending, no tax
cuts or rises and no inflation, and two per cent GDP growth, it would take the
Government about 100 years to wipe out its debt.

However, it is impossible to envisage this
Government, never mind successive Governments way into the future, willing to
impose such discipline on itself.

Despite all the talk of “cuts”, in 2012 Government
spending actually grew at the rate of 1.6 per cent. On the basis that this rate
of spending growth is the bare minimum a Government - and an electorate - is
prepared to put up with, it follows that, at a GDP growth rate of two per cent,
the State has only 0.4 per cent of its proceeds to devote to paying down its
debt.

A borrowing reduction of 0.4 per cent of GDP is
£2,336 million.

At that rate, it would take the State 36 years to
reach the point where it no longer needs to borrow money. In that time,
however, the total debt would have increased by about £1,272 billion bringing
the total Government debt to £2.5 trillion.

If, at that point, the Government continued to
increase spending at no more than 1.6 per cent per year on average and UK GDP
remained at two per cent, the total debt mountain would start to be cleared at
a rate of £2,336 million (£2.3 billion) a year.

Actually this would increase as GDP rose so let’s
be generous and assume tis has miraculously increased to £3 billion.

In that case, the number of years it would take to
wipe out the debt completely is: £2,500 billion/£3 billion = 833 years to which
we must add the 36 years it will take before we no longer need to borrow any
money.

In other words, it will never be wiped out.

Which explains why today’s politicians have no
intention of tackling the debt seriously. It’s not their problem. It’s our
bequest to future generations. We are mortgaging the future for generations to
come.